The Costs of Trading NASDAQ Issues: The Impact of Limit Orders and Ecn Quotes

Posted: 10 Feb 1998

See all articles by Michael J. Barclay

Michael J. Barclay

University of Rochester - Simon School (Deceased)

William G. Christie

Vanderbilt University - Finance; Vanderbilt University - Law School

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Paul H. Schultz

University of Notre Dame - Department of Finance

Date Written: August 27, 1997

Abstract

On January 20, 1997, the Securities and Exchange Commission began requiring Nasdaq market makers to execute or display customer limit orders. In addition, Nasdaq began displaying quotes placed by market makers to execute or display customer limit orders. In addition, Nasdaq began displaying quotes placed by market makers in Electronic Communication Networks (ECN). We assess the impact of these new rules on various measures of trading costs, including quoted and effective spreads. We also use individual dealer quotes to examine the strategic response of market makers to their increased ability to post wider spreads (through a relaxation in the Excess Spread Rule) and to offer minimum quote sizes of 100 rather than 1,000 or 500 shares. Our results indicate that trading costs fell dramatically in the presence of these new rules. Trade sizes have also fallen significantly, particularly among trades executed through the Small Order Execution System. However, the net effect of incorporating limit orders and ECN quotes translates into savings of approximately $1.6 million per day among the first 100 stocks traded under the new rules.

JEL Classification: G12, G14

Suggested Citation

Barclay, Michael J. and Christie, Wiliam G. and Harris, Jeffrey H. and Kandel, Eugene and Schultz, Paul H., The Costs of Trading NASDAQ Issues: The Impact of Limit Orders and Ecn Quotes (August 27, 1997). Available at SSRN: https://ssrn.com/abstract=58429

Michael J. Barclay

University of Rochester - Simon School (Deceased)

N/A

Wiliam G. Christie

Vanderbilt University - Finance ( email )

401 21st Avenue South
Owen Graduate School of Management
Nashville, TN 37203
United States
615-343-7802 (Phone)
615-343-7177 (Fax)

Vanderbilt University - Law School

131 21st Avenue South
Nashville, TN 37203-1181
United States

Jeffrey H. Harris

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paul H. Schultz (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

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